FNAN 300 - Ch. 2

For a mature firm, operating cash flow:

-is usually positive -is a sign of trouble if negative over a long period of time

Non-cash items do not affect:

cash flow

If the Federal marginal tax bracket is 34%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

$600,000

According to the originators of the current U.S. corporate tax code, the only rates are:

15%, 25%, 34%, 35%

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

Accounts receivable

Which of the following is NOT a component of cash flow from assets?

Financial expenses

What are two ways in which financial accountants usually classify costs?

Product costs & period costs

Net earnings refers to income earned _____

after interest and taxes

The short run is _____

an imprecise period of time

Net working capital will be negative when current assets _____ current liabilities

are less than

Stockholders' equity is always shown on the _____ of the balance sheet

right side

If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?

$115

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

$20

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is _____

$50 (100-60+10)

Which of the following are classified as fixed assets on the balance sheet?

-Buildings -Patents -Trademarks

What does stockholders' equity represent?

A residual claim against the firm's assets

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

What does GAAP stand for?

Generally accepted accounting principles

(T/F) Free cash flow is very similar to cash flow from assets

True

(T/F) Operating cash flow does not include depreciation or interest

True

In finance, the value of a firm depends on its ability to generate _____

cash flows

Cash flow to stockholders equals _____

dividends paid minus net new equity raised

Costs that do not change in the short run arise because of _____

fixed commitments

The purpose of a(n) _____ is to measure performance over a set period of time

income statement

The _____ tax rate is the tax rate paid on the next dollar of income

marginal

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Physical assets are termed _____ assets

tangible

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

-$50

What should you keep in mind when examining an income statement?

-GAAP -cash vs. non-cash items -time and cost

Which of these questions can be answered by reviewing a firm's balance sheet?

-How much debt is used to finance the firm -What is the total amount of assets the firm owns

Which of the following are classified as liabilities on the firm's balance sheet?

-Long-term debt -Accounts Payable

When is revenue recognized on an income statement?

-When the exchange of goods or services is completed -When the earnings process is virtually complete

Assets can be categorized as...

-current and fixed assets -tangible and intangible assets

Marginal tax rates are the most important tax rates because:

-financial decisions are usually based on new cash flows -incremental cash flows are taxed at marginal tax rates

Depreciation is the accountant's estimate of the cost of _____ used in the production process matched with the benefits produced from owning it

-fixed assets -equipment

Under GAAP, assets are generally carried on a firm's balance sheet at _____

-historical cost -book value

Long-term liabilities represent obligations of the firm lasting over _____

1 year

Which of the following is true?

Cash flows can be derived from financial statements

The cash flow identity states that the cash flow from _____ should equal cash flows to creditors and equity investors

assets

On the balance sheet, assets are listed at their _____ value

book

Net working capital equals _____

current assets minus current liabilities

The more debt a firm has, the greater its:

degree of financial leverage

Net capital spending is equal to the change in net fixed assets plus:

depreciation

When a firm smooths earnings to please investors, it is called _____

earnings management

The GAAP matching principle requires revenue to be matched with:

expenses

Period costs are the costs that are allocated to a specific _____

interval of time

The price at which willing buyers and sellers would trade is called _____ value

market

Non-cash items are expenses that directly affect _____ but do not directly affect _____

net income; cash flow

A positive operating cash flow indicates that the firm is generating enough cash to:

pay operating costs

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets _____

plus depreciation

On a balance sheet, total assets must always equal total liabilities plus:

shareholders' equity

Changes in capital spending can be negative if

the firm sold more assets than it purchased

Common stockholders are entitled to the difference between _____ and _____

total assets ; total liabilities